Question 1

A taxpayer can qualify for the home sale exclusion even if she has moved out of the home and is renting the home to another at the time of the sale.

Accepted Answer

As long as the taxpayer owned and used the home as a primary residence for 2 out of the 5 years prior to the sale, they can qualify for the home sale exclusion regardless of whether they currently live in the home or are renting it out.

Question 2

A taxpayer is not allowed to deduct home mortgage interest on debt unless the debt was incurred to acquire or construct the home.

Accepted Answer

Taxpayers can also deduct home mortgage interest on debt incurred to substantially improve their home, in addition to debt incurred to acquire or construct the home.

Question 3

A taxpayer who sells a principal residence that has been used as a rental propertyafter 2005 will not be allowed to exclude the portion of the gain attributable to depreciation even if the taxpayer meets the ownership and use tests and the gain realized on the sale is lower than the maximum exclusion amount.

Accepted Answer

This is correct according to the rules laid out by the IRS. The portion of the gain attributable to depreciation is considered "recaptured" and is subject to taxation at a higher rate. However, the taxpayer can still exclude the portion of the gain that is attributable to ownership and use tests and falls below the maximum exclusion amount.

Question 4

Jacoby purchased a homein 2017 for $1,500,000 by making a $150,000 down payment and by borrowing the remaining $1,350,000 with a loan secured by the home. He made interest-only payments for 2017, 2018, 2019 and 2020. In 2020, Jacoby can deduct interest expense on $1,100,000 of the loan principal.

Accepted Answer

As of the tax laws in effect for the years mentioned, the IRS limits the mortgage interest deduction to interest paid on the first $750,000 of loan principal for loans taken out after December 15, 2017. Since Jacoby's loan exceeds this amount, he can only deduct interest on up to $750,000 of his loan principal, not $1,100,000.

Question 5

When determining the number of days a taxpayer has rented out a home during the year, any day when the home is available for rent but not actually rented out counts as a day of rental use.

Accepted Answer

For tax purposes, a day of rental use only counts when the home is actually rented out to someone and not merely available for rent.

Question 6

A taxpayer who otherwise meets the ownership and use testson the sale of her principal residence may not be allowed to exclude all of her realized gain if the taxpayer has nonqualified use of the home before selling.

Accepted Answer

This is true. If a taxpayer has nonqualified use of their home before selling, they may have to allocate the gain between the qualified and nonqualified use portions and may not be able to exclude all of the realized gain.

Question 7

A taxpayer who rents out a home for at least one day and does not use a home for personal purposes for more than 14 days during the year is ineligible to deduct any home mortgage interest expense on a loan secured by the home.

Accepted Answer

According to the IRS rules, if a taxpayer rents out their home for more than 14 days in a year and uses it for personal purposes for less than the greater of 14 days or 10% of the total days rented, they are considered to be operating a rental property. In this case, they may deduct mortgage interest expense as a rental expense but not as a home mortgage interest deduction.

Question 8

In certain circumstances, a taxpayer who does not meet the ownership and use tests may still be allowed to exclude the entire realized gain on the sale of a principal residence.

Accepted Answer

This is known as the "unforeseen circumstance" exception, and it applies if the sale is due to a change in employment, health reasons, or unforeseen circumstances such as a divorce or multiple births resulting in a need for a larger home. Certain qualifications and requirements must be met for this exception to apply.

Question 9

A married couple filing a joint tax return is eligible to exclude up to $500,000 of gain realized on the sale of a personal residence if both spouses meet the ownership test and at least one spouse meets the use test.

Accepted Answer

The answer of A married couple filing a joint tax...

Question 10

At most, a taxpayer is allowed to exclude gain on the sale of a principal residence once every five years no matter the circumstances.

Accepted Answer

This statement is false. Taxpayers can exclude gain on the sale of a principal residence as often as once every two years as long as they meet certain eligibility requirements, such as owning and using the home as their primary residence for at least two of the previous five years.

Question 11

For determining whether a taxpayer qualifies to exclude gain on the sale of a principal residence, the periods of ownership and use need not be continuous nor do they need to cover the same two-year period.

Accepted Answer

The IRS allows for non-continuous ownership and use periods to be considered when determining whether a taxpayer qualifies for the exclusion of gain on the sale of their principal residence.

Question 12

A personal residence is not a capital asset.

Accepted Answer

A personal residence is considered a capital asset under the Internal Revenue Code, unless it is used for business or rental purposes.

Question 13

Taxpayers meeting certain requirements may be allowed to exclude at least a portion of gain realized on the sale of a principal residence.

Accepted Answer

This is true. Taxpayers who meet certain requirements - such as owning and using their home as their primary residence for at least two out of the past five years - may be eligible to exclude up to $250,000 ($500,000 for married taxpayers filing jointly) of gain realized on the sale of their principal residence.

Question 14

The ownership test for excluding gain on the sale of a principal residence requires the taxpayer to have owned the property for three or more years during the five-year period ending on the date of sale.

Accepted Answer

The ownership test for excluding gain on the sale of a principal residence requires the taxpayer to have owned the property for at least two years during the five-year period ending on the date of sale.

Question 15

To be allowed to exclude gain on the sale of a principal residence, the taxpayer selling the home must be using the home as a principal residence at the time of the sale.

Accepted Answer

The taxpayer must have used the home as their principal residence for at least two out of the five years leading up to the sale, but they do not need to be living in the home at the time of the sale.

Question 16

Renting a residence may have nontax advantages over owning a home.

Accepted Answer

Renting can provide flexibility in terms of location and the ability to easily move without the stress and costs of selling a home. Additionally, renters do not have to pay for home maintenance or property taxes, which can be significant expenses for homeowners.

Question 17

For tax purposes a dwelling unit is a residence if the taxpayer's number of personal-use days of the unit is more than 10 days.

Accepted Answer

A dwelling unit is considered a residence for tax purposes if the taxpayer's personal-use days exceed the greater of 14 days or 10% of the total days the unit is rented at a fair rental price.

Question 18

When determining the number of days a taxpayer has rented out a home during the year, any day when the home is available for rent but not actually rented out counts as a day of personal use.

Accepted Answer

A day when the home is available for rent but not actually rented out does not count as a day of personal use; it is considered a day of rental availability, not personal or rental use.

Question 19

The tax law places a fixed dollar limit on the amount of home mortgage interest a taxpayer may deduct in a particular year.

Accepted Answer

The tax law does not place a fixed dollar limit on the amount of home mortgage interest a taxpayer may deduct. Instead, it limits the deduction to the interest paid on up to $750,000 ($375,000 if married filing separately) of mortgage debt incurred after December 15, 2017, to buy, build, or substantially improve a primary or secondary home. The limit was $1 million ($500,000 if married filing separately) for loans taken out before December 16, 2017.

Question 20

A taxpayer may be required to include in gross incomethe gain the taxpayer realizes when she sells her principal residence.

Accepted Answer

According to IRS rules, a taxpayer may be required to include in gross income the gain realized from the sale of their principal residence, unless certain exceptions apply such as the primary residence exclusion, which allows for up to $250,000 ($500,000 for married filing jointly) of gain to be excluded.

Quiz 14: Tax Consequences of Home Ownership